How to Handle Sales Tax on Freight Charges

The taxability of freight charges is a component of state and local sales tax systems, not a separate federal mandate. This tax is applied to the cost of transporting goods from a seller to a buyer. The rules governing when and how to apply this tax are determined at the state level, leading to a variety of regulations across the country.

Identifying Taxable Freight Charges

Whether a freight charge is subject to sales tax hinges on state-specific laws and the transaction’s nature. A primary factor is whether the freight is connected to the sale of taxable tangible personal property. If the item sold is taxable, many states also consider the associated shipping charges taxable, as delivery is viewed as part of the sale. The way the charge is presented on an invoice can also impact its taxability.

When freight charges are included in an item’s total price without being listed separately, they are almost always subject to sales tax if the item is taxable. This bundled charge is considered part of the total sales price. When the freight charge is a separate line item, some states may exempt it from sales tax, while in others, the charge remains taxable regardless of presentation.

The terms of the sale, specifically the Free on Board (FOB) point, can also influence taxability. FOB Shipping Point signifies the buyer takes ownership of goods when they leave the seller’s location, and the transportation charges may be non-taxable. Conversely, FOB Destination means the seller retains ownership until delivery, making the shipping a service provided by the seller and more likely to be taxable.

If a shipment contains both taxable and non-taxable items, businesses must allocate the freight charges. Some states allow the portion of the shipping cost attributed to non-taxable items to be exempt from sales tax. This requires a reasonable allocation method, such as prorating the cost based on the weight or price of the items.

Key Exemptions for Freight Tax

Exemptions may apply even when freight charges are associated with taxable goods. One exemption relates to the sale of goods intended for resale. When a business purchases items to sell to other customers, the shipping charges are not taxable if the purchaser provides a valid resale or exemption certificate.

Another exemption applies to freight charges associated with the sale of non-taxable items. If the underlying product being shipped is exempt from sales tax, then the cost to transport that product is also exempt. For example, if a state exempts prescription drugs from sales tax, the separately stated shipping charge for delivering those drugs would also be non-taxable.

Using a common carrier like the USPS, UPS, or FedEx can create an exemption in some states. A common carrier is a transportation company that offers its services to the public. If shipping is provided by a common carrier and the cost is billed to the customer or separately stated on the invoice, the charge may be exempt from sales tax. This rule often requires the charge to reflect the actual shipping cost.

It is also important to distinguish between “shipping” and “handling.” While often grouped together, some states treat them differently for tax purposes. A handling charge, which covers the cost of preparing an item for shipment, is more likely to be considered a taxable service. If a single, combined “shipping and handling” fee is listed on an invoice, the entire amount may become taxable, even if the pure shipping component would have been exempt on its own.

Calculating the Freight Tax Amount

Once a freight charge is determined to be taxable, the tax must be calculated. The tax base is the dollar amount of the freight charge subject to taxation. This is the separately stated shipping fee or the portion of the sales price attributed to shipping.

The correct tax rate is the combined state and local rate effective at the delivery location. Sales tax rates vary by jurisdiction, as they are a combination of state, county, and city taxes. The seller must identify the precise rate for the customer’s shipping address. Using an incorrect rate can lead to under-collecting tax, which the business must pay, or over-collecting, which creates liability.

The calculation is the taxable freight charge multiplied by the applicable sales tax rate. For instance, if a taxable freight charge is $50 and the local sales tax rate is 8%, the sales tax on the freight would be $4 ($50 x 0.08). This calculated tax on freight must then be added to the sales tax calculated on the products themselves.

Reporting and Remitting Collected Taxes

After collecting sales tax on freight, businesses must report and remit these funds to the state tax agency. The tax on shipping is not reported separately but is combined with the sales tax from products. This total is reported on the state’s sales and use tax return, with taxable freight charges included in the total gross and taxable receipts figures.

Filing the return and submitting payment is handled through a state’s online tax portal. Filing frequency—monthly, quarterly, or annually—is determined by the state based on the volume of sales tax collected. Businesses must adhere to state filing deadlines.

Late filing or payment can result in penalties and interest, often calculated as a percentage of the tax due. Businesses must maintain clear records of all sales transactions, including invoices showing how sales tax was applied to products and freight. These documents are needed to substantiate compliance during an audit.